It’s because they aren’t thinking about it the right way. The thing that the big console makers (Sony, Microsoft, Nintendo) don’t seem to understand is that when it comes to hardware you have to go for efficiency. Applying the construct that I am going to have every single one of my components made just for my console is NOT cost effective even when you have a dedicated supplier. In the current setup, they will always be at the mercy of the market and thus they will always lose.

I know this sounds crazy but they should team up.. on components at least.

To make this easy to understand, let’s look at car manufacturing for example. Does anyone remember the huge uproar a few months back when they were talking about the repercussions of the Big 3 US automakers failing, where they talked about companies like Honda and Toyota and others would be negatively affected because there would be less buyers thus they would have to front more of the cost. In manufacturing they get the concepts of modularization and components, the thought that even though we make different products both of our products use this same component let’s partner up and buy that component in bulk from the same manufacturers and thus bring our overall cost down. This is what the Big 3 console makers don’t seem to understand and its killing their profits. When it comes to hardware, prices are dependent upon supply and demand of course but the more things that use the same hardware component, the cheaper that component ultimately becomes. Take DVD players for example, when they first came out they were expensive then demand increased more manufactures got in the game and the prices reduced dramatically to the point where most people see them as just a commodity item to be replaced when they break not repaired. I am not saying that consoles will ever be that way because they won’t, but the components can be.

Companies will always have their niche, their competitive advantage and that is important but to make money on the single most expensive item in the system you have to drive down hardware cost and the only real way to do that is to team up. They need to find all the places they can to combine and standardize components. Then they need to modularize the consoles themselves to make it so that consumers can fix this stuff when it breaks. They can team up with the manufacturers to get a piece for a deal or just use components that are already mass produced now. For instance, hard drive failure or corruption is a fairly common occurrence and if it happens to my laptop or PC I go buy a new one for like $30 or $40 bucks, slide the bad one out and the new one in, put two cables back on the new one and I am good to go. If my hard drive crashes on the PS3 or the Xbox 360 I need to send it back to them (you can do it yourself but most people don’t). This is a really inefficient business model, the resources those companies put into repairing systems could really be used for something else or at least modularize it to the point where only very major things require the customer sending the physical machine in.

This concept has worked in the computer world for years, there is no reason that consoles should be any different. If a PS3 hard drive crashes I should be able to run out to Best Buy, pick up a replacement for under $50 and be up an running again in less than an hour. This is why on the next gen they need to come together and decide on a standard disc drive, if its Blu-Ray then everyone should use Blu-Ray and that will drive down the cost for all of them. They have to make the next gen consoles easy to fix at home by the average consumer, they should be able to replace their own hard drive and disc drive, and upgrade memory (the next gen’s should have RAM) at the very least. Those three things, if you could do them at home WITHOUT breaking your warranty would be more effective for the consumers as well as the companies.

If they can standardize on some core components, they can drive down cost for all of them.

Lower Cost=More Profit.

We think that it would be in the best interest of the Big 3 to not make the same mistakes they have always made, and combine resources at least on those components that they can agree to standardize on. That is the only way they will turn a profit on the hardware in a reasonable amount of time and it should bring the overall production cost of the units down. This should allow them to price them lower while still increasing profits because of the decreased production cost. You can either have a console that you sell for $399-499 and lose money on every single one with the old construct or you could have a console that you sold for $299 but you made 50-75 dollars on, even though that number sounds small its astronomical when you think amount the number of units each console moves and if you take into account that fact that making money vs losing it is always a good thing.

The Big 3 gaming companies would be wise to learn from the automotive industry and realize that just because you are the king today doesn’t mean it will always be that way. Think about it this way all it would take is for a company to come around and create a console that was even 85-90% comparable to the next gen consoles but they charged only $249 or less and still made a profit because they optimized their production cost? It could turn the gaming world on its ear and that possibility is not as far fetched as you might think. Gamers go for quality and yes they have their loyalties but in the end its about product saturation and a lower price point would get people to try it and sometimes that’s all you need. For a long time nobody thought that anyone could supplant Yahoo as far as search and then came Google, the Big 3 automakers thought that no one would ever supplant them that people would always “BUY American” and then came Toyota and Honda. What I am trying to say is that nothing lasts forever and either you innovate or die.

The bottom line is that at the end of the day money talks and bull$#@! walks, its all about cost because no matter how much money they make on the residuals and add-ons they would love to make money from the jump on the hardware too. The gaming industry is a billion dollar market and there is definitely room to grow. I suppose the question though is this, if another console came along that provided 85-90% of the capability of The Big 3, most of the same titles, a superior online gaming community and experience and had a price tag of $249 or less would you try it? I would and that should make Sony, Nintendo, and Microsoft nervous because that is all it really would take to completely alter the entire landscape of gaming as we know it today. Anyway, what do you think?

I am the Co-Ceo of DLT Digital Media. We are a company that is focused on developing new and innovative web properties in addition to developing WordPress based web sites for others. But before I was all that, I was a gamer.